Van Pelt v. Strickland

The opinion of the court was delivered by Smith, J. : By exercising his right of set-off as against the corporation, the defendant in error defeated the plaintiff below in his effort to obtain-judgment for a greater part of the latter’s liability as a stockholder to creditors. The defendant below might be said to have had two funds available for the payment of his judgment of $5500 against the corporation, rendered on the defaulted debenture bonds held by him : (1) His own liability as a stockholder in the corporation to the amount of $6000; (2) his interest in the debenture securities executed and delivered directly to him by the corporation ; while the plaintiff in error could look to but one fund — the stockholder’s liability of defendant in error. It is a general rule of equity that if a prior creditor satisfies his demand out of a fund which alone is pledged to a junior creditor, and thereby exhausts that fund, equity will subrogate [588] the latter creditor to the former’s lien upon that fund which.is not exhausted. (Sheld. Sub., § 62.) See, as particularly applicable to the facts in the case at bar, Hudkins v. Ward, 30 W. Va. 204, 3 S. E. 600. The defendant below, when sued as a stockholder, said to plaintiff: "The corporation owes me nearly as much as the amount of my stock, as evidenced by my judgment against it on its debenture bonds. I will set off this liability of the corporation to me against my liability to you as a stockholder.” The position taken by the defendant below was concurred in by the trial court. He was allowed,to offset the amount of his claim and judgment against the trust company as against his stockholder’s liability. His statutory liability as such stockholder was discharged by the surrender of his claim against the corporation on the debenture bonds. The plaintiff below now says : "Give to me the claim which the defendant had against the corporation. His use of it as a set-off against the corporation prevented me from obtaining a judgment against him on his liability as a stockholder. He has thus, to the extent of said claim, been discharged from his liability to me by reason thereof.” The defendant below can have no interest in opposing the demand of the plaintiff below, for the former has no further claim against the corporation based on the debenture bonds. He has used the same in discharge of his liability as a stockholder. If, as is said, there is $500 or any other amount to the credit of the defendant in error in the hands of the debenture trustees, the proceeds of mortgages deposited to secure the debentures, he cannot receive it. He must and has. surrendered all claim to the same. The case is not analogous to bonds paid by the company. If the [589] company has paid them its capital stock or assets would have been diminished in proportion to the amount paid. This process of set-off did not have such effect. Miles Strickland and his associate debenture holders never contracted with the trust company or with each other with reference to a contingency presented by the case at bar, and the same could not, in the reason of things, have been anticipated. If the contention of plaintiff in error is to prevail, the debt which the corporation owes him is satisfied to the extent of the amount he can collect on the $400 judgment against the Strickland estate and the amount he may collect on the debenture bonds held by Strickland. The amounts plaintiff in error may thus receive reduces his judgment against the corporation in proportion, consequently relieving other stockholders from their liability to him, without affecting any of the rights of the defendant in error. It seems to us that the rules of equity demand an assignment by defendant in' error of the debentures and judgment thereon to the plaintiff in error, placing him in the shoes of defendant below. The prayer for general relief is sufficient to permit the equities of the parties to be thus adjusted under the pleadings. Nor do we think that the trustees holding the securities back of the debentures are necessary parties. The defendant below can be required to make the assignment of his debentures and judgment, which are mere choses in action, on pain of suffering a personal judgment to be rendered against him for the whole amount of the judgment of plaintiff below against the corporation, or a decree entered which shall itself operate as an assignment. Such a disposition of the case benefits other stockholders and nowise affects prejudicially the rights of defendant in error. In Crippen v. Chap [590] pel, 35 Kan. 499, 11 Pac. 453, it is said : “The right of subrogation, or of equitable assignment, is not founded upon contract alone, nor upon the absence of contract, but is founded upon the facts and circumstances of the particular case, and upon principles of natural justice.” The equitable rights of the plaintiff in error are superior to those of the debenture holders, because it is solely through the suit brought by the former that the stockholder’s liability of the defendant in error became available for the payment of his claim. It is only by reason of this suit that the security in the hands of the trustees is released for the benefit of any creditor of the insolvent corporation. The judgment will be modified, with directions to the court below to proceed further in accordance with this opinion.